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Avenue Supermarts tanks 9% as Q3 margin shrinks

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New Delhi: Shares of Avenue Supermarts fell over 9 per cent on Monday as its profit for the December quarter came in flat as against a growth of 10-18 per cent as expected by analysts.

Slow store addition added to investors’ concerns.

The scrip fell 9.27 per cent to hit a low of Rs 1,423.40 on the BSE today.

The operator of D-Mart chain of stores on Saturday reported a 2.1 per cent year-on-year (YoY) rise in profit after tax (PAT) at Rs 257 crore for the December quarter. It had reported Rs 252 crore profit in the year-ago quarter.

The flat growth in profit was mainly due to gross margin reduction on account of price cuts, the food and grocery retailer told the BSE.

Revenue for the quarter jumped 33.2 per cent YoY to Rs 5,451 crore.

While brokerages were largely expecting the Radhakishan Damani-led firm to report 30 per cent-plus growth in sales, they were expecting the retailer to report profit growth in 10-18 per cent range.

“Management’s sustained focus on sales growth (by cutting MRPs) at the cost of margin was evident in Q3 as well– a necessity in light of rising competition. Moreover, pre-loading of expenses for capability building and higher store opex for longer working hours added to margin pressure,” said Edelweiss Securities.

The brokerage said the store addition pace has been much slower than management’s guidance. While the recent policy change for e-commerce companies augurs well for D-Mart, implementation will be the key.

“Margin expansion will be restricted by increased price competitiveness by peers, as indicated by channel check. Valuations appear rich at 73 times/54 times FY20/21E P/E. We, thus, see limited room for re-rating. Maintain Sell with a target of Rs 1,400, ascribing 65 times P/E on FY20E (on the back of strong competitive moat),” Motilal Oswal Securities said.

Edelweiss has retained its ‘reduce’ rating on the stock with a target price of Rs 1,300.

Source: Economic Times